Can Europe Contain The Fireball?

Can Europe contain the fireball of financial contagion that is hopscotching across the Continent?
Last week U.S. stock markets suffered significant declines and the fundamental and technical indicators flash significant warnings as we look ahead to December and what is usually the start of the seasonal “Santa Rally.”

In the chart of the S&P 500 (NYSEARCA:SPY) above you can see how a sell signal is in place with an initial price objective of 1050, approximately 9% from Friday’s close.

The index now rests at the Bullish Support Line which is the demarcation between bull/bear markets and a break below this level would be a significantly bearish development.

The Economic View From 35,000 Feet
The Dow Jones Industrial Average (NYSEARCA:DIA) suffered its worst Thanksgiving week decline since the depths of The Great Depression in 1932 while Italian (NYSEARCA:EWI) and Spanish (NYSEARCA:EWP) equity and bond markets were hammered by nervous market participants as the European crisis hurtled towards what could be a fiery climax. A widely followed European Index, iShares MSCI EAFE (NYSEARCA:EFA) is down more than 12% over the last month as the financial contagion seems to be spreading to the core.

Overseas, the news was glum as Belgium’s and Hungary’s credit was downgraded, Germany couldn’t find enough buyers for its bond auction, Greece made new demands for deeper “haircuts” from its bondholders, Greek one year bond yields hit 300% and Italy had to pay record high yields of 6.5% on its six month bonds. China reported a contraction in manufacturing with its HSBC’s preliminary survey dropping to 48, a level last seen 32 months ago.

The Telegraphreports from London that the British Foreign Office is drawing up plans for riots caused by a Euro collapse that they now view as just being a “matter of time.”

At home, 3rd Quarter GDP was revised downward to 2.0% from 2.5%, the Congressional “super committee” proved less than super as they failed to reach a deficit reduction agreement and the Fed announced new stress tests for 31 major U.S. banks.

On the positive side of the ledger, October existing home sales climbed, new unemployment claims declined and weekly unemployment claims stayed below the widely watched 400,000 level.

The Wall Street Week Ahead
Next week brings a slew of important economic reports including October New Home Sales on Monday, Case-Shiller Home Prices and Consumer Confidence on Tuesday, Chicago PMI, Wednesday, unemployment and November Institute of Supply Manufacturing (ISM) on Thursday, all capped off with the all important monthly Non Farm Payrolls and Unemployment Reports on Friday.

Bottom Line For Stock Market and ETF InvestorsEurope continues to dominate and trumps all other potentially positive economic news. While the International Monetary Fund, IMF, is reportedly preparing up to a 600 billion Euro loan for Italy (Bloomberg) and Germany and France are leading moves towards a more powerful European financial union, markets seem to be moving faster than leaders can respond.

A new global recession, at best, and a global financial panic, at worst, appear to be gaining momentum as probable outcomes.

Money printing by the European Central Bank is likely the only solution/firewall that Europe can deploy to contain the financial contagion. So far, Germany has stonewalled that strategy and so the situation will remain volatile and fluid depending upon the outcome of decisions made in Paris and Bonn. If ECB and/or IMF intervention is the result, then certainly the groundwork would be set for the traditional “Santa Rally.”